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Dollar Strength: No Free Lunch

Don’t look now, but the Turkish lira is taking a beating again. Much of it is self-inflicted (Erdogan), but it’s impossible to ignore the fact that the breakout from both the white channel and the more aggressive red channel occurred as the DXY rebounded sharply from it’s February lows.

About 50% of Turkey’s external debt is denominated in US dollars — roughly twice as much as its total foreign reserves. And, Turkey’s not the only country in trouble. According to the BIS, EM dollar-denominated debt totals $3.7 trillion. It recently published a list of 13 countries whose debt represents a bubble just waiting to pop.

The US, as a net importer, benefits from a strong dollar. It keeps inflation low and helps prop up the stock market. But, at what point might the brewing currency crisis come home to roost?

Futures are off about 5 points this morning, with ES currently backtesting the channel from which it broke out yesterday. Holding it will be the important test for equities. Stronger support remains at 2878.5, where the red channel bottom intersects with the former highs.